Toxic finance: Reckless payday lender Wonga wipes mountain of debt

Thousands of customers who took loans with controversial pay day lender Wonga are to have their debts written off, in an action expected to cost the ‘legal loan shark’ more than 200 million pounds.

The company will wipe
the debts of 330,000 customers who are trapped in arrears of 30
days or more, while a further 45,000 customers will get to repay
their loans exempt from interest.

The move is a “consequence” of Wonga’s discussions with the
Financial Conduct Authority (FCA), who said the firm “was not
taking adequate steps to assess customers’ ability to meet
repayments in a sustainable manner.”

The FCA also said that Wonga did not do enough to vet customers
and their ability to pay back the interest incurred on loans,
which can be higher than 5,000 percent.

As a result, a large number of Wonga customers were forced to
admit they were unable to pay the company back after taking out a
short-term loan.

“We are determined to drive up standards in the consumer
credit market and it is disappointing that some firms still have
a way to go to meet our expectations,” said the FCA’s
Director of Supervision Clive Anderson.

Last month, the payday lender recorded a profit loss of 53
percent – one of the largest slumps in its operating history.

The lender revealed its pre-tax profit in 2013 was 39.7 million
pounds, down from 84.5 million the previous year.

Wonga said the fall was due to “remediation costs” – money that
it had to pay back to its customers – including 2.6 million
pounds it had to pay out to more than 45,000 customers after it
delivered debt collection letters from non-existent law firms.

However, Wonga did record a 15 percent rise in the number of
loans issued between 2012 and 2013, worth 4.6 million pounds.

Wonga’s Chairman Andy Haste told British media there was a “real
and urgent” need for change.

He also told the BBC it expected to be “smaller” and “less
profitable” following increased FCA regulations, which include
more stringent background credit checks.

“Our regulator is determined to improve standards in consumer
credit and I share that determination,” he said.

“There is much to do in order to make Wonga a sustainable and
accepted business, and today’s announcement is a significant step
forward in that process.

Labour MP John Mann
called for Wonga to be brought before Parliament’s Treasury
Select Committee to “explain how they lent so much money to
people it knew could never afford to repay it.”

“Sadly, it comes as no surprise to learn that Wonga knowingly
lent money to people who will never be able to afford to repay a
loan and it is morally right that they have been forced to write
off these loans,” he added.

This is not the first time Wonga has come under heavy criticism
for its practices.

Since July, the firm has not been allowed to produce
advertisements designed to attract young people, such as its
campaign that used puppets, screened during children’s television
programming – an attempt to soften the brand, critics allege.

In 2012, Wonga was also forced to apologize to Labour MP Stella
Creasy after she received personal abuse via Twitter, calling her
“nuts,” “pathetic” and “a raving self-publicist.”

The MP has long been outspoken on payday loan companies, and has
lobbied the government to set a cap on the amount customers can
be charged for small, short term loans.

While the MP welcomed the fall in Wonga’s profits, she said the
rise in the number of loans being issued should be a cause of
concern.

“The fact that they are reporting a 15 percent increase in
customers for this toxic form of finance reflects that there are
still millions of people for whom there is too much month at the
end of their money,” she told the Financial Times.

Under new rules issued by the FCA, payday lenders will not be
able to reclaim debts directly from customers’ bank accounts,
while a cap of 0.8 percent interest per day has been proposed for
short term loans.

According to the UK’s Public Accounts Committee, around 2 million
people in the UK used payday loans, while the Office of Fair
Trading believes around 1.8 billion pounds is loaned in high cost
plans each year.